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Financial Planning > College Planning > Student Loan Debt

What RIAs Should Know About Stimulus’ Paycheck Protection Loans: DeVoe

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The small-business loans available under the $2.2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act present an important opportunity for all RIAs to consider, according to DeVoe & Co. and Live Oak Bank executives.

The main loan option under the law is the Paycheck Protection Program, Brad Grubb, managing director of financial services consulting firm DeVoe & Co., pointed out Wednesday during the webinar “CARES Act: Relief for RIAs and Clients.” The law sets aside $349 billion, and Treasury Secretary Steven Mnuchin has pledged to make additional money available if needed.

(Free Webinar April 8: Jeff Levine & Jamie Hopkins Explain Stimulus’ Small Biz Loans)

PPP was designed to help small businesses keep workers on their payroll now that the economy has been largely shut down and many businesses are facing challenges to stay afloat. Advisor clients who own small businesses may also be able to participate in the program.

Details of Paycheck Protection Program

According to Mike McGinley, executive vice president of small business banking at Wilmington, North Carolina-based Live Oak Bank, there are several key features and benefits of the PPP loans:

  • They are potentially forgivable.
  • No collateral or personal guarantees are required.
  • Loan fees are waived.
  • There is payment deferral.
  • There are no prepayment penalties.
  • There is a maximum rate and term.
  • There is coordination with other federal support.

However, there are several conditions that RIAs must consider. For starters, to qualify, “you have to have been in business prior to Feb. 15,” and that means “open and operational,” McGinley said.

Also, you must have less than 500 employees to be eligible. “If you happen to have more than 500 employees, then the typical” Small Business Administration 7(a)  “standards apply, but most [RIAs] would fall into that under 500 employee category,” he explained.

Standout positives of PPP loans include that there are no fees and they are six months deferred, he said. However, there are another 18 months of principal and interest payments, boosting their maturity to a total of two years, he noted, adding there is a 0.5% fixed interest rate.

“The entire loan amount can potentially be forgiven,” he said, but explained that will depend on the number of employees an RIA firm has before the loan is taken out and eight weeks after it.

Payroll Spending Loan’s Magic Number: 75%

RIAs taking out such a loan must also show that 75% of their expenses are being used for payroll, he noted.

“If you keep all of your employees and you’re paying them the same amount” as you did prior to the loan being taken out, “then, in all likelihood, the entire loan will be forgiven,” McGinley said.

Another caveat to keep in mind: You must avoid cutting pay by more than 25% in order to qualify for total forgiveness, he added, noting if pay is slashed more than that, there will be some part of the loan that must be repaid that will be prorated based on how much lower the pay is.

Bonus Buried in Express Loan Option

Another option for RIAs is an Express Loan, McGinley pointed out. These loans require less documentation than a typical 75% guaranteed SBA 7(a) program loan and the stimulus law “increased the limit from $350,000 to $1 million temporarily through the end” of 2020, he said.

One thing that is “not really a headline, but is embedded in the CARES Act is anyone who currently has an SBA 7(a) loan and also originates one over the next six months will get six months of principal and interest paid for by the federal government,” McGinley also said.

“So, for our current customers or any other 7(a) current customers, starting April 1, they will have six months of principle and interest paid for them and then for any new loans that are originated via the 7(a) program, the first six months will be paid for by the government,” McGinley told listeners.

Drawback of Disaster Loans

RIAs can also consider the SBA’s longstanding Economic Injury Disaster Loan Program, which has been expanded under the CARES Act. Offered directly through SBA, these loans are for up to $2 million for a terms as long as 30 years at a 3.75% fixed interest rate, with no fees, he said.

One drawback: There is no forgiveness option.

He recommended that RIAs, if they want, apply for both PPP and an Economic Injury Disaster Loan. However, he said he was still waiting for clarification on whether an applicant could receive both.

He also recommended that RIAs file quickly. As of now, the loans will be offered through June 30.

“We don’t know how long it’s going to take to process these quite yet because … we’re waiting for final guidance from the SBA on what we need in order to submit,” McGinley said.

For now, a good place to start is to get the necessary documentation ready, he adds; that documentation, for now, includes:

  • Form 941 for the last four quarters (year end 2019 or through March 31, 2020 if it is ready).
  • Form 1096 for year end 2019 (if 1099 employees are included in one’s calculation).
  • If you are a sole proprietor and using net income for calculation, you will need a year-end tax return for 2019 or a profit and loss statement verifying net income.

RIAs planning to apply or get more information online at the SBA website, should keep in mind that the agency is “pretty well overwhelmed at this point in time,” Grubb pointed out.

“We have been on their website and it has crashed multiple times while completing information and seeking information, so if you do go on the website just understand that you do need to be patient,” he said.

(Free Webinar April 8: Jeff Levine & Jamie Hopkins Explain Stimulus’ Small Biz Loans)

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